Indexation- Restored or Redesigned?
By CA. Ramya Rao, Member of the Institute
Executive Summary
The Finance (No. 2) Act, 2024, initially led many to believe that indexation benefits had been restored for long-term capital gains on land and buildings, creating an illusion of relief. However, a closer look reveals that while the second proviso to Section 112(1)(a) offers a tax cap through a notional comparison with the pre-amendment regime, actual capital gains computation no longer includes indexed costs. This inflates taxable income, leading to the loss of rebates and exposure to surcharges if income exceeds ₹50 lakh. Furthermore, capital losses arising due to indexation are no longer recognized, eliminating the option for carry-forward or set-off.
Introduction
It has been nearly a year since the Finance (No. 2) Act, 2024, reshaped the Indian tax landscape, and yet, one provision continues to spark debate among tax professionals and taxpayers alike—‘The Indexation’. While the Act spanned reforms across personal income tax, corporate taxation, green initiatives, and digital compliance, the most significant and far-reaching impact has arguably emerged in the domain of capital gains taxation, which has seen a historic shift in both computation and taxation.
The Finance Bill (No. 2), 2024, had proposed to withdraw the indexation benefit altogether. However, what eventually found its way into the final Act was more calibrated: a tax liability cap that simulates relief. It may look like indexation has returned—but has it, really?
Evolution of Indexation: A Quick Recap
The concept of indexation has matured significantly since its inception in Indian tax law. It was first implemented in the 1992 Budget, following recommendations from the Raja Chelliah Committee, which sought to rationalise the taxation of long-term capital gains (LTCG) by accounting for inflation. The government introduced the Cost Inflation Index (CII), with 1981-82 as the base year (index value = 100), allowing taxpayers to adjust the cost of acquisition and improvement for inflation. This ensured that only real gains, and not nominal increases due to inflation, were taxed.
In 2001, the government shifted the base year for indexation from 1981 to 2001 to simplify valuation and align it with more accessible historical data. More recently, the year 2024 saw a significant policy shift, with the gradual withdrawal of indexation benefits culminating in the Finance (No. 2) Act, 2024, which eliminated indexation for all capital assets in gain computation. But a pertinent question remains: Even after its withdrawal, does indexation persist in a different form?
Demystifying the Concept
At first glance, the final provisions led to a wave of optimism, with many interpreting them as a revival of indexation for LTCG. This perception stemmed from the shift between the original Finance Bill and the enacted law, which introduced a tax liability cap on the sale of land and buildings by resident individuals and HUFs.
But as is often the case in taxation, the devil lies in the details. Traditionally, Section 48 of the Income-tax Act, 1961, governed indexation by allowing the deduction of "indexed cost of acquisition" and "indexed cost of improvement" while calculating gains. The Finance Act (No. 2), 2024, changed these rules. The second proviso to Section 48 now makes it clear that for transfers on or after 23rd July 2024, indexation is no longer available for computing capital gains.
Then, Why the Talk of “Restoration”?
This confusion stems from a new relaxation introduced under the second proviso to Section 112(1)(a). The proviso attempts to cushion the impact of the withdrawn benefit at the time of tax computation, though not for income inclusion. From this, it can be deduced that:
- The benefit of indexation exists only for tax liability comparison, not for computing the actual capital gain.
- Relief is allowed effectively “at the tax stage” if it results in lower tax payable, but not at the stage of income computation.
- This relief is available only for the sale of land or buildings (or both) by a Resident Individual or HUF. It is not available for Non-Resident Individuals, Companies, LLPs, or Partnership Firms.
Consequently, the capital gain added to the Gross Total Income will not reflect any indexed cost. It is not a return of indexation but a cleverly worded tax cap.
Analysis and Illustration
The reality of the post-amendment regime is that reported capital gains are inflated because indexation is unavailable. This raises total income significantly, which can push an assessee past rebate thresholds (such as ₹7 lakh or ₹12 lakh from FY 2025-26 onwards) and into surcharge territory.
Loss of Losses: One of the most understated implications is the erosion of capital losses that previously arose due to indexation. Under the old regime, an inflated indexed cost could turn a high-value transfer into a long-term capital loss eligible for carry-forward and set-off. The new regime eliminates this possibility. For example, a property purchased for ₹1 crore and sold for ₹1.2 crore would have generated a capital loss of over ₹1.6 crore under the old regime (using indexed costs). Post-23rd July 2024, this flips into a taxable gain of ₹20 lakh.
Ideal Reinvestment
Whether investing under Sections 54, 54EC, or 54F, the maximum amount eligible for exemption remains unchanged from the pre-amendment regime for properties acquired before 23rd July 2024. The proviso in Section 112(1)(a) ensures that excess tax payable due to the withdrawal of indexation is ignored, provided reinvestment complies with pre-amendment limits.
Conclusion
The "restoration" of indexation is, in effect, a comparative tax capping mechanism rather than a reinstatement of the original benefit. For practitioners and taxpayers, it is crucial to differentiate between Indexed gains (which impact gross income) and Indexed tax (which impacts only final liability). Precise planning is now required to navigate the interplay between gross income reporting and tax liability computation to minimize the tax impact under this new regime.
References:
- Income Tax Act, 1961 (via incometaxindia.gov.in)
- Relevant instructional videos (via YouTube)
Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial Reporting
By CA. (Dr.) Sanjeev Kumar Singhal & CA. Vishal Doshi, Members of the Institute
Introduction
In an evolving global economic environment, high-quality financial reporting plays a significant role, as transparent and comparable information forms the backbone of investor confidence and capital-market efficiency. India has already implemented globally accepted Indian Accounting Standards (Ind AS) for large companies, which are converged with International Financial Reporting Standards. Building on this, the Accounting Standards Board (ASB) of the ICAI has formulated the proposed Ind AS 118, Presentation and Disclosure in Financial Statements, to redefine the structure and clarity of financial statements.
Redefining Financial Communication
While India currently utilizes the presentation format of Schedule III to the Companies Act, 2013, the proposed Ind AS 118 aims to improve how entities communicate their financial story. The standard is based on principles of relevance, faithful representation, and enhanced comparability. It specifically focuses on the statement of profit and loss, introducing new requirements for presentation and disclosure without changing the measurement of financial performance. This standard is converged with IFRS 18, issued by the International Accounting Standards Board (IASB), aligning India with global best practices.
Effective Date
- Globally: Accounting periods beginning on or after January 1, 2027.
- Proposed in India: Annual reporting periods beginning on or after April 1, 2027, as per the ICAI Exposure Draft.
Main Changes in the Profit or Loss Section
Ind AS 118 introduces requirements for the presentation of defined subtotals in the statement of profit or loss to provide a more structured summary.
Mixed Presentation of Expenses The standard proposes that entities classify and present expenses in line items using the nature of expenses, the function of expenses, or both—referred to as "mixed presentation". An entity must determine the classification that provides the most useful information regarding profitability drivers and closely represents how the entity is managed internally. It is not a free choice; entities must provide the most useful structured summary possible.
Entities that present expenses classified by function are required to disclose the following in a single note:
- Depreciation and Amortization
- Employee benefits
- Impairment losses and reversals
- Write-downs and reversals of inventory
This represents a major change in India, as Ind AS 1 currently requires only nature-wise classification of expenses.
Management-defined Performance Measures (MPMs)
Entities often use subtotals of income and expenses outside of financial statements to provide insights into performance. Ind AS 118 requires information about these MPMs to be included in a single note to improve transparency. An MPM is defined as a subtotal that:
- Is used in public communications outside financial statements.
- Communicates management’s view of an aspect of the entity's overall financial performance.
- Is not specifically required by Ind AS.
Examples of MPMs include adjusted profit, adjusted operating profit, and adjusted EBITDA. Other measures like free cash flow, return on equity, and net debt are classified as other performance measures.
Enhanced Aggregation and Disaggregation
Often, financial information is either not shown in enough detail or is obscured by too much detail. Ind AS 118 sets out principles for grouping transactions to ensure items with similar characteristics are aggregated and those that differ are disaggregated. This ensures that material information is not obscured and the financial statements remain understandable.
Consequential Amendments
Ind AS 118 will replace Ind AS 1, Presentation of Financial Statements. Existing requirements in Ind AS 1 will be replaced, transferred to the new standard, or moved to Ind AS 8 or Ind AS 107. Additionally, IAS 7 (and consequently Ind AS 7) has been revised to remove presentation alternatives for cash flows related to interest and dividends to ensure global consistency.
Preparing for Implementation
Although the effective date is in the future, entities are encouraged to assess the potential impact early and begin planning for these new requirements.
References:
- Exposure Draft of Ind AS 118 issued by the ASB, ICAI
- Project summary and Effects analysis of IFRS 18 issued by the IASB
- IFRS 18 Effects Analysis (April 2024)
The Consolidation Conundrum: Real-World Battles with Ind AS 110 That Every CA Must Win
By CA. Nekzad Bajan, Member of the Institute
Executive Summary
Ind AS 110 has transformed consolidation from a mechanical exercise into a battlefield of professional judgment. This article addresses the complex challenges faced by Indian Chartered Accountants in implementing control-based consolidation, covering real-world failures, practical frameworks for assessing control in Special Purpose Vehicles (SPVs), regulatory enforcement trends from SEBI and NFRA, and documentation strategies to withstand scrutiny. With penalties exceeding ₹50 crores and increasing enforcement actions against CFOs and audit firms, mastering Ind AS 110 is essential for regulatory compliance in India.
The ₹500 Crore Mistake: Why Consolidation Keeps CFOs Awake
Imagine the scenario: A CFO discovers that three "independent" SPVs worth ₹500 crores should have been consolidated, leading to serious concerns from auditors and regulators like SEBI. This reflects a daily reality for Indian corporates since the implementation of Ind AS 110. The transition from AS 21 to Ind AS 110 fundamentally shifted the landscape from a straightforward majority ownership test to a complex web of judgment calls.
While AS 21 simply required answering whether you owned 51% of an entity, Ind AS 110 demands analysis across three interconnected dimensions:
- Whether you possess power over the investee.
- Whether you face exposure to variable returns from involvement.
- Whether you can utilize power to influence those returns.
The SPV Deception: When Small Entities Hide Massive Risks
Special Purpose Vehicles constitute the operational backbone of sectors like infrastructure and real estate but are also a primary source of consolidation failures.
- Case Study: A Mumbai-based infrastructure giant established 20 SPVs with nominal share capital (₹1 lakh each) and independent boards to satisfy auditors.
- The Reality: The parent company provided ₹200 crores in subordinated debt to each SPV, creating total financial dependence. Auditors discovered that the parent company’s CEO provided direct instructions to SPV boards on operational matters.
- Impact: Challenging the treatment forced ₹10,000 crores of debt onto the parent's balance sheet. Legal independence is meaningless when economic dependence is comprehensive.
The Forty Percent Controlling Shareholder: De Facto Control
In modern corporate structures, promoters often maintain effective control with minority shareholdings.
- Case Study: In a pharmaceutical company, the promoter group held only 42% of shares. However, they appointed six out of nine board members and had unilateral authority over management.
- Impact: A new auditor forced consolidation of this "associate," adding ₹800 crores in debt and leading to a 15% credit rating downgrade.
The Option Trap: When Future Rights Create Present Obligations
Potential voting rights generated via call options are particularly complex in the fintech sector.
- Case Study: An NBFC acquired 30% of a payments company with call options for an additional 25%. The CFO argued options were "merely potential" control.
- The Analysis: Auditors found the options were currently exercisable and economically beneficial due to a significant discount to fair value.
- Impact: This transformed a ₹200 crore investment into a consolidation of ₹800 crores in assets and ₹400 crores in liabilities.
The Joint Venture Masquerade
Fifty-fifty joint ventures are often structured to keep assets off-balance sheet, but Ind AS 110 requires testing for control first.
- Case Study: A bank and an NBFC formed a 50/50 co-lending platform. While governance appeared balanced, the NBFC's technology platform powered all operations and its employees held 70% of management positions.
- Impact: The venture was reclassified as a subsidiary, adding ₹500 crores to the NBFC’s balance sheet.
The Startup Consolidation Challenge
India’s startup ecosystem introduces new challenges like ESOP trusts and complex investor rights.
- ESOP Trusts: A leading e-commerce platform argued for trust independence, but analysis showed the company controlled all trustee appointments and trust operations required company approval. The trust was deemed an extension of the company.
- Strategic Investors: A strategic investor holding only 20% ownership obtained board control and veto rights, resulting in unexpected consolidation requirements.
The Documentation Imperative: Building Defensible Positions
Comprehensive documentation is essential survival armor. A leading audit firm found that 70% of consolidation challenges could be avoided through better documentation. Successful practitioners maintain:
- Annual control matrices for all investees.
- Voting pattern summaries for board resolutions.
- Economic risk and reward mapping.
The Regulatory Environment: Consequences of Errors
The enforcement environment is increasingly aggressive. SEBI’s 2023-24 scorecard includes:
- ₹50 crores in consolidation-related penalties.
- 15 companies required to restate financial statements.
- 12 audit firms subjected to quality reviews.
National Financial Reporting Authority (NFRA) reviews found that 40% of audits contained consolidation deficiencies, primarily due to over-reliance on legal form and inadequate documentation.
Future Considerations and Conclusion
The landscape continues to evolve with:
- Cryptocurrency and Digital Assets: Assessing control over decentralized autonomous organizations (DAOs).
- AI and Platforms: Scenarios where automated systems make operational decisions.
- ESG and Impact Investing: New control paradigms for sustainability-linked arrangements.
Ind AS 110 is a critical career differentiator. The fundamental lesson is that substance invariably trumps form. Professional skepticism and regular reassessment are non-negotiable for successful consolidation practice.
References:
- SEBI Enforcement Actions Report 2023-24
- NFRA Audit Quality Review Technical Bulletin No. 12
- ICAI Research Publication: Ind AS 110 Implementation Challenges
- Relevant publications from EY, KPMG, Deloitte, and PwC
- Supreme Court of India (Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta)
Permanent Establishment: Understanding its Nuances from Leading Judicial Decisions
By CA. (Dr.) Prajakta Mondhe, Member of the Institute
Introduction
The recent Supreme Court (SC) judgement in the case of Hyatt International Southwest Asia Ltd. has reignited discussions regarding the constitution of a Permanent Establishment (PE) for foreign companies in India. The Hon’ble Supreme Court upheld the Delhi High Court's decision, ruling that Hyatt International (a global hotel chain) has a fixed place PE in India. Consequently, income derived under its Strategic Oversight Services Agreement (SOSA) is taxable in India. This development, following other landmark decisions like Formula One and E-Funds Inc., raises critical questions about the circumstances under which a PE is triggered for foreign entities.
Permanent Establishment in India
In recent years, foreign companies have increasingly engaged Indian entities to outsource backend operations such as accounting, human resources, and software services. Indian tax authorities are concerned that such arrangements may be used to avoid tax implications in India. Whenever a foreign company outsources operations or conducts business in India via a subsidiary or third-party contract, there is a risk the arrangement could be construed as a PE.
The term PE is defined under Section 92F of the Income Tax Act, 1961 (referenced as Section 173 in the Income-tax Act, 2025), as a fixed place of business through which the enterprise's business is wholly or partly carried on. Broadly, the Double Taxation Avoidance Agreements (DTAA) categorize PE into:
- Fixed Place PE: A place where a foreign company has permanency and the right to use it for business purposes.
- Service PE: Furnishing services through employees or personnel, generally for a period exceeding 183 days within a 12-month period (treaty-dependent).
- Agency PE: When an agent habitually concludes contracts or plays a principal role in doing so on behalf of the foreign company without material modification. This can also arise if an agent maintains a stock of goods for regular delivery.
The Significance of PE and "Business Connection"
The concept of PE is vital because business profits of a foreign enterprise cannot be taxed by a Source State unless a PE is proven to exist. Under the Indian Income-tax Act, the comparable term is "business connection," which prescribes conditions for considering a foreign company as conducting business in India. The concept of "business connection" is wider than PE; however, profits are only taxable if a PE is established under the respective DTAA.
The Three Essential Tests for PE
To determine if an enterprise is a PE, courts analyze three primary tests:
- Location and Permanency Test
- Disposal Test
- Business Activity Test
A Fixed Place PE is established if a foreign company has a place of business in India that possesses some level of permanency and is available at its disposal for conducting business activities. Courts have held that the specific duration of availability may be irrelevant if, in substance, the place was available for business. While UN and OECD commentaries generally suggest a place maintained for less than six months is not a PE, Indian judicial precedents have nuanced this.
Landmark Decisions: Formula One and Hyatt International
The Supreme Court judgement in Formula One highlighted that a Fixed Place PE can be constituted regardless of duration. In that case, a UK company granted hosting rights for an F-1 race at a circuit owned by an Indian company. Because the UK company had full access and could dictate access to the circuit, and no other events were permitted during that time, the circuit was deemed at their disposal with sufficient permanency to constitute a PE.
In the recent Hyatt International case, the SC relied on the Formula One precedent. Hyatt provided strategic planning and "know-how" to Asia Hotels Limited (AHL) India via a SOSA. Hyatt executives frequently visited India to oversee core operations like recruitment and policy formulation. Although their stay was less than the nine months prescribed for a Service PE in the India-UAE DTAA, the SC found that Hyatt exercised core managerial control over the hotel's day-to-day operations. Furthermore, the revenue-sharing agreement based on AHL’s Indian revenue established that Hyatt had a place of business at its disposal, resulting in a Fixed Place PE.
Subsidiary as a PE
An Indian subsidiary may be termed a PE if it acts as a fixed place for the foreign parent to carry out its business.
- In Carpi Tech SA v. ADIT, a Switzerland-based company was found to have a PE because its Indian subsidiary's address was used for all project-related correspondences and contract signatures.
- In Huawei Technologies Co. Ltd. v. ACIT, a subsidiary was held to be a PE because its employees were actively involved in negotiating and concluding contracts on behalf of the foreign parent.
- Conversely, in Progress Rail Locomotive Inc. v. DCIT, the court held that a subsidiary did not result in a PE because there was no evidence the foreign parent's business was managed by the subsidiary.
- Similarly, liaison offices generally do not constitute a PE if they only assist in information exchange and do not conduct business activities.
Outsourcing and Deputation of Employees
In ***Morgan Stanley & Co.***, the SC analyzed PE categories where an Indian company provided backend support.
- Fixed Place PE: Not established for back-office operations (IT support, account reconciliation) as these are preparatory or auxiliary.
- Agency PE: Not established if the Indian entity cannot conclude contracts for the foreign company.
- Service PE: Bifurcated into stewardship activities (no PE) and deputed employees. Because deputed employees remained on the foreign company's payroll and the parent remained responsible for their work, a Service PE was established.
Other cases like E-Funds IT Solution Inc. found no Service PE because the Indian entity bore the remuneration and controlled the employees, and no customers were in India. However, in Centrica India Offshore and Teradata Operations, a Service PE was established because the right to dismiss and pay salaries vested with the overseas entity.
Conclusion
Modern India focuses on substance over legal form. A PE may be established if a foreign company has a place of business under its control at its disposal for business activities. If services are purely backend or auxiliary, they may not lead to a PE. Similarly, if employees provide only stewardship or are controlled by an Indian employer, a Service PE may not exist. Ultimately, the determination of a PE depends on the specific facts and circumstances of each individual case.
The MSME Evolution: From Credit-Constrained Units to Equity-Funded Corporations
By CA. Manoj Lamba, Member of the Institute
Introduction
If you had asked a small factory owner in Ludhiana or a textile merchant in Surat ten years ago about “listing on the stock exchange,” they would have thought you were joking. For decades, the “Indian MSME” was synonymous with perseverance. It was “informal,” “unorganized,” and “perpetually in debt”. The dream wasn't to go public; it was simply to get the bank manager to extend the Cash Credit (CC) limit by another five lakhs.
But today, we are standing in a different India. We are witnessing a “Great Formalization”. The Indian MSME is no longer just a provider of low-cost employment; it is becoming a sophisticated, equity-funded engine. This deep-dive pulls back the curtain on the regulatory shifts of 2025, the new “Rules of the Game” for IPOs, and why balance sheets need a complete rethink for the next decade.
The Macro Reality – Breaking the 30% Barrier
Data is the language of the bank. By the end of the 2024-25 fiscal year, the MSME sector’s contribution to India’s GDP stabilized at 30.1%. This represents a significant recovery from the pandemic low of 27.3% in 2020-21. More importantly, MSMEs are now responsible for 45.79% of India’s total exports.
The Udyam-GST Marriage
The secret sauce behind this growth is the Udyam Registration Portal, which crossed 6.5 crore registrations by late 2025. The portal is now seamlessly integrated with the GSTN and Income Tax databases. Gone are the days when a business could report different turnover figures to the bank, the taxman, and the labor department. Today, transparent data creates trust, which is the vital currency of the capital market. This verified data has made the current SME IPO boom possible.
The Death of “Dwarfism” – The 2025 Classification Revolution
"Dwarfism"—where companies stay small on purpose to avoid losing subsidies and priority sector lending—has been a long-standing issue. The Union Budget 2025-26 addressed this by providing "Growth Headroom" through revised limits effective April 1, 2025.
Breaking Down the New Limits:
- Medium Category: A company can now have an investment of ₹125 crore and a turnover of ₹500 crore and still be classified as an MSME.
- This allows firms to scale, modernize, and hire top-tier talent while still enjoying MSME interest rates and protection under the Credit Guarantee Scheme.
- The CGTMSE guarantee ceiling has been doubled to ₹10 crore, offering significant collateral-free credit for modernization.
The SME Exchange – From “Lottery” to “Legitimate Market”
The SME IPO market in 2023 and 2024 was often speculative, with "shell-like" companies seeing massive oversubscriptions and doubling in value on day one.
The July 1, 2025 Reform: A Game Changer: Regulators introduced several key changes to stabilize the market:
- The ₹2 Lakh Filter: The minimum application size was raised to over ₹2 lakh (minimum 2 lots), replacing short-term "retail gamblers" with investors who have higher risk tolerance and capital.
- Discontinuation of “Cut-off Price”: Investors must now specify a price rather than just opting for the determined cut-off, forcing a review of the Draft Red Herring Prospectus (DRHP).
- No Cancellation/Modification: Bids are now final once submitted, stopping market operators from inflating subscription numbers with fake demand.
The Result: SME IPOs in late 2025 and early 2026 are more "sober," with listing gains of 10-20% and long-term partners replacing "flippers".
Case Studies – Blueprints of Success
- Jyoti CNC Automation Ltd: A manufacturing player that went public in 2024. By January 2026, its market cap exceeded ₹22,000 crore. It used IPO proceeds to strengthen its balance sheet and launch high-end products.
- Suyog Telematics Ltd: This company used the SME platform as a launchpad to strengthen its fundamentals and successfully transitioned to the Mainboard in late 2024.
The Financial Infrastructure – CGTMSE and Digital Credit
Lending is shifting from "Asset-Based" (requiring house collateral) to “Cash-Flow Based Lending”. Real-time GST data allows banks to see current sales rather than two-year-old balance sheets, creating "Digital Credit" to bridge the ₹30 lakh crore credit gap. The expanded ₹10 crore CGTMSE guarantee provides the psychological shift needed for banks to lend without mortgages.
The Export Promotion Mission (EPM) – Winning the World
Launched in late 2025 with ₹25,060 crore, the EPM focuses on two pillars:
- Niryat Protsahan (The Money): Offers interest subvention, export factoring, and specialized credit cards for e-commerce exporters to manage international working capital.
- Niryat Disha (The Method): Provides assistance with international certifications, packaging, branding, and mandates that 35% of participants in international trade fairs must be MSMEs.
The “Productivity Gap” – Our Greatest Challenge
As of late 2025, Indian MSMEs are only 18% as productive as large-scale industries, compared to 60% in the US or Germany. Lags are caused by manual processes, skill gaps for "Industry 4.0," and the "silent killer" of delayed payments, which stifle innovation. The “MSME-TEAM” scheme was launched to address this through trade enablement and technology adoption.
The Social Impact – Inclusion and Empowerment
The sector employs 29 crore people. By 2026, women-owned MSMEs account for 22% of rural units, supported by the “Yashasvini” campaign’s focus on mentoring and digital skills. Furthermore, the growth story is decentralized, with 51% of recognized startups emerging from Tier II and Tier III cities.
Preparing for the Future – The ZED Standard
To join global supply chains for giants like Apple or Walmart, MSMEs must understand ZED (Zero Defect, Zero Effect). By late 2025, over 2.83 lakh enterprises were ZED certified, signaling high quality and sustainability. In 2026, ESG is a survival requirement, and investors specifically seek "Green MSMEs".
Checklist for Entrepreneurs: 12-Month Action Plan
- Audit Your Classification: Re-classify on Udyam to utilize the new ₹500 crore turnover limit for the "Medium" category.
- Clean Up the Books: Transparency is essential for high valuation and going public.
- Invest in Technology: Use MSME-TEAM incentives to automate production.
- Explore Equity: Consider diluting ownership to scale up.
- Go Global: Utilize EPM guidelines to find international buyers.
Final Thoughts
The evolution of the Indian MSME from a “credit-starved unit” to an “equity-funded corporation” is the most significant structural shift in the economy since 1991. The "Safety Net" of classification limits, the "Launchpad" of the SME Exchange, and the "Wind in the Sails" of the Export Mission have created a perfect storm for growth. The question is: Are you ready to stop surviving and start scaling?
Author may be reached at camanojlamba@gmail.com and eboard@icai.in
Valuation of Distressed Real Estate Assets in India: Challenges, Evolving Practices and Methodology
By Arohan Maggo, Valuation and Banking Expert
Introduction
The valuation of real estate is of supreme significance to the economy as it strongly influences outcomes related to expenditure, loans, and asset redemption. Recently, India's financial system has observed an exceptional increase in stressed and non-performing assets (NPAs), particularly within the real estate sector. Due to numerous stalled projects and unpurchased supplies, the careful valuation of these distressed assets has become the backbone for judicious decision-making in insolvency processes, asset restoration, and monetary reorganization. This practice is not merely an arithmetical application but a systematic examination involving skillful discernment, remunerative judgment, and jurisprudence.
Understanding Distressed Real Estate Assets
A distressed real estate asset refers to any property under financial, legal, or operational stress where the owner or developer is unable to meet debt commitments, conclude an undertaking, or conserve commercial price. Typical examples include projects undergoing insolvency under the Insolvency and Bankruptcy Code (IBC), 2016, assets seized under the SARFAESI Act, 2002, stalled construction projects, and properties entangled in legal disputes.
Distressed value refers to the diminished value at which a building might be sold under critical situations like expropriation or sudden necessity for money. For creditors, this constitutes the lowest estimate they can retrieve if the property is auctioned, serving as an essential criterion for asset-based lending.
Challenges in Valuation
Valuing distressed properties presents unique hurdles that go beyond traditional procedures:
- Data Deficiency: Projects often have irretrievable agreements or missing authorized proposals, complicating title authentication.
- Legal Complexities: Lawsuits, unsettled sanctions, and ambiguous titles cause significant unpredictability in asset merit.
- Market Illiquidity: Negative sentiment often leads to low buyer interest, necessitating depreciation adjustments for lower liquidity and the exigency of an involuntary sale.
- Incomplete Development: Stalled or vandalized properties suffer from price inflation, degradation, and deviations from initial blueprints.
- Time-Bound Valuations: Insolvency procedures often demand speedy assessments, restricting thorough site examination and consumer analysis.
- Standardization Gap: There is often a disparity in selecting valuation methods and evaluating "fair value" versus "liquidation value".
Valuation Methodologies and Practical Adaptations
Valuers typically adapt the three conventional methods or use a hybrid strategy.
1. Market Approach This approach determines value by comparing similar recently sold assets. Finding comparable sales for distressed assets is difficult as such transactions are rarely reported.
- Adaptations: Valuers should use extensive regional or sectoral comparables while adjusting for a distress discount (often 10%–40%) and liquidity.
- Proxy Data: Information from SARFAESI auctions and IBC resolution plans can serve as useful proxies.
- Case Study: For a 20,000 sq. ft. commercial office under SARFAESI, a pre-distress price of ₹8,500/sq. ft. might be adjusted by a 25% distress discount and a 10% liquidity discount to arrive at a final market value of ₹11.50 crore.
2. Income Approach This method converts anticipated future economic benefits into present value.
- Adaptations: For stalled projects, valuers construct projected cash flows based on industry averages or revival assumptions.
- Risk Premium: Discount rates are typically increased by 4%–8% over the industry WACC to reflect illiquidity and legal uncertainty.
- Case Study: A stressed commercial building with high vacancy might have its Net Operating Income capitalized at a stressed capitalization rate (e.g., 12% instead of a normal 8.5%) and further discounted for the time required to stabilize.
3. Cost Approach This estimates value based on the principle of substitution (replacement cost less depreciation). It is often the most practical method for incomplete or stalled projects.
- Adaptations: Valuers often use replacement cost rather than reproduction cost. They must capture higher physical deterioration from neglect and consider external obsolescence like regulatory restrictions.
- Case Study: Land is valued separately (often with a distress discount), and the Depreciated Replacement Cost (DRC) of structures is added. A stress factor is assumed for economic obsolescence (typically 15%–30% for SARFAESI/NCLT cases).
4. Hybrid Approach Valuers are encouraged to reconcile multiple approaches to derive a defensible range. The Cost Approach provides a floor value, the Market Approach captures current realizable value, and the Income Approach offers potential going-concern value if the asset is revived.
Emerging Trends and Opportunities
Despite the challenges, this field is growing:
- Asset Reconstruction Companies (ARCs) and Private Equity Funds are actively acquiring NPAs.
- The establishment of the National Asset Reconstruction Company Limited (NARCL) has increased demand for independent valuation.
- Technology Integration: Drones, GIS mapping, and AI-driven data analysis are improving accuracy.
- There is a rising emphasis on ESG (Environmental, Social, and Governance) considerations, which influence asset value even in distress.
Recommendations for Strengthening the Framework
To enhance the credibility of distressed asset valuation, the author suggests:
- IBBI or RVOs should issue specific, standardized guidelines for insolvency contexts.
- Implement a mandatory disclosure format for key assumptions and risk factors.
- Focus on capacity building through specialized training on forensic and IBC aspects.
- Foster cross-disciplinary collaboration between valuers, lawyers, and insolvency professionals.
- Develop a national database for distressed real estate transactions to improve benchmarking.
- Encourage hybrid approaches that integrate multiple methods with attention to asset-specific risks.
Conclusion
Valuing distressed real estate in India is both an art and a science, requiring financial rigor and legal understanding. By embracing best practices and transparent standards, valuers play a key role in determines outcomes for creditors and investors, ultimately facilitating India's economic revival.
Author may be reached at arohan.maggo71@gmail.com and eboard@icai.in
Cloud-Based Accounting: Transforming Financial Management In The Digital Era
By Om Prakash Prasad, Finance Expert
Executive Summary
This paper explores the evolution, benefits, and challenges of cloud-based accounting systems in the digital economy. Cloud-based accounting offers the flexibility to manage finances anytime and anywhere, enabling real-time collaboration, automation, cost savings, and regulatory compliance. While its popularity stems from mobile access, scalability, and integration capabilities, persistent issues include cybersecurity, vendor lock-in, and internet reliance. Emerging trends point toward the growing influence of AI, blockchain, and stricter regulations, underscoring its strategic importance in modern financial management.
Concept and Architecture of Cloud-Based Accounting
Financial software hosted on remote servers rather than local desktop computers is referred to as cloud-based accounting. These systems use cloud computing technologies to deliver functions like bookkeeping, financial reporting, and payroll on a subscription-based basis. The core architecture consists of three layers:
- Infrastructure-as-a-Service (IaaS): Provides foundational IT resources such as storage and servers.
- Platform-as-a-Service (PaaS): Provides a platform for developers to build customized applications.
- Software-as-a-Service (SaaS): Delivers the actual accounting applications used by end-users.
Cloud vs. Traditional Accounting Software
The fundamental difference lies in collaboration and accessibility. Cloud systems allow multiple users to work simultaneously from any location with an internet connection without paperwork. In contrast, conventional software is installed on a single system, limiting access to that specific location and device.
The Need for Cloud-Based Solutions
Cloud-based accounting is increasingly a necessity rather than a choice for modern business agility. It provides a centralized, real-time solution for businesses operating across multiple locations, such as retail chains and MNCs. The rise of SaaS models like Tally Prime has made these platforms popular among Indian SMEs due to their affordability, automation, and compliance readiness.
Adoption and Market Context
India’s Accounting Software Market was valued at USD 3.38 billion in 2024 and is projected to reach USD 5.75 billion by 2030. This growth is fueled by increased digitization, government initiatives like GST integration, and the demand for real-time reporting. Businesses should adopt these solutions when seeking cost-effective financial administration and to avoid the errors associated with growing manual bookkeeping or spreadsheets.
Key Drivers of Adoption
- Cost Efficiency: Reduces capital expenditure on IT infrastructure through a pay-as-you-go pricing model.
- Accessibility and Mobility: Enables access from any device, a feature that became crucial for remote auditing during the pandemic.
- Scalability: Allows firms to scale operations quickly without significant IT infrastructure changes.
- Integration Capabilities: Provides API connectivity with ERP, CRM, and banking systems for automatic reconciliations.
- Innovation and Automation: Uses AI to categorize transactions and generate audit trails, reducing human error.
Benefits and Sectoral Applications
Cloud-based systems enhance decision-making through real-time analytics and interactive dashboards. They foster enhanced collaboration among stakeholders like tax advisors and auditors. Furthermore, they support environmental sustainability by minimizing paper use.
- SMEs and Startups: Benefit from low entry costs and sophisticated tools.
- Public Sector and NGOs: Use systems for transparent budget tracking and grant management.
- Healthcare and Retail: Facilitate insurance reimbursements and supply chain visibility.
Drawbacks and Implementation Challenges
- Cybersecurity: Financial data is a primary target for hackers, requiring robust encryption and multi-factor authentication.
- Regulatory Compliance: Providers must adhere to international standards (ISO 27001) and strict data localization rules.
- Internet Dependency: A stable connection is a prerequisite, which can be a barrier in rural regions.
- Resistance to Change: Traditional firms may resist adoption due to lack of digital literacy.
- Vendor Lock-In: Difficulty in switching vendors due to differing data formats.
Comparative Case Studies
- South Africa: Perceived ease of use and top management support significantly influenced adoption in SMEs.
- China: Deployment in manufacturing firms resulted in significant cost savings and optimized inventory through AI integration.
- Middle East: Cloud computing improved sustainability accounting and digital audits in Jordanian companies.
- United States: Non-profits used cloud tools for managing large donor networks and real-time fund tracking.
Way Forward and Conclusion
The future of cloud accounting lies in AI and Machine Learning integration for fraud detection, blockchain for unalterable audit trails, and customized solutions for niche industries. Cloud-based accounting is a strategic shift that enables organizations to be more agile and data-driven. As digital transformation evolves, it has become a necessity for firms to remain competitive and compliant in a changing landscape.
References:
- Bala, H., et al. (2024). Effect of Cloud Accounting Computing on Firm Performance.
- Dlamini, B. (2025). Key Drivers of Cloud Accounting Utilization.
- Esawi, K. A. M., et al. (2025). Impact of Cloud Computing on Quality of Financial Reports.
- Additional sources from researchandmarkets.com, Statista, and HBR.
Navigating the Complexities of Work-Life Balance
By CA. Rajesh Chaplot, Member of the Institute
Introduction
The concept of “work-life balance” is fast becoming a cornerstone of modern discourse, promising harmony amidst the noise of professional and personal demands. However, the reality is far more complex—a delicate dance between the pressure of work, the need for a livelihood, ambition, and well-being. Achieving sustainable balance requires a nuanced understanding of its components and a commitment to enacting meaningful change.
Dispelling Misconceptions
While the Industrial Revolution more clearly defined the separation between work and home, today's challenges are vastly different. It is crucial to understand that work-life balance is not a perfectly symmetrical division of time; neither a rigid 50/50 split nor a fixed formula like "8 hours of work" is correct.
Work-life balance is a dynamic equilibrium and a continuous journey of evolution, adaptation, and adjustment. It is the ability to effectively manage and prioritize responsibilities across various domains, including career, family, personal interests, sleep, and health. Crucially, it is a subjective experience; balance for one person may look entirely different for another.
Choices and Consequences
Recent public debates regarding longer working hours to increase productivity have often lacked context. While life is important for holistic well-being, life without a career is often a life without purpose, making luxury a "pipe dream". As Jack Welch, former CEO of General Electric, famously stated: “There’s no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences”.
Defining the Components
Work-life balance consists of two primary components:
- Work:
- Career-related work: Activities undertaken to achieve life goals, performed at the office or home.
- Home-related work: Household management and daily errands like laundry, cleaning, and childcare.
- Life:
- Recharging: Activities to remove fatigue and recharge the body and mind (sleep, exercise, entertainment).
- Social: Devoting time to family, friends, and the community.
- Personal growth: Time for knowledge updates and personal interests.
Modern Challenges
Several factors hinder balance in today's world:
- Technological Intrusion: Smartphones blur the lines between work and personal time.
- The “Always-On” Culture: Constant availability leads to burnout and stress.
- Remote Work: While flexible, it often fails to establish firm boundaries between home and office.
- Infrastructural Challenges: In India and elsewhere, precious hours are lost to inefficient road and rail networks and traffic jams.
- Changing Family Structures: Dual-income households and single parenthood increase the difficulty of managing responsibilities.
The Employer's Role
Employers must foster a culture that supports balance through:
- Flexibility: Offering remote work or compressed workweeks.
- Outcome-based wages: Focusing on deliverables and performance rather than traditional "in-time/out-time" calculations.
- HR Policies: Assuring minimum wages and defined limits on overtime.
- Ending "Presenteeism": Discouraging the negative practice where subordinates feel they cannot leave the office before their seniors.
Balance Across Different Categories
The balance equation changes based on one's professional category:
- Category 1 (Students/Self-Employed/Artists): These individuals are self-motivated and passionate. Their balance may incline heavily toward work to produce outstanding results without sacrificing health.
- Category 2 (CEOs/Decision Makers): Senior professionals whose decisions impact society must often be available 24/7. Their balance is naturally inclined toward work at the cost of other activities, but not at the cost of well-being.
- Category 3 (Workers): Often engaged in monotonous work for a living, this group requires legal protection of their work hours and job security to maintain balance.
- Category 4 (General Office/Sales Staff): Often working only for a living, this class is the most vocal about balance and may be vulnerable to exploitation.
- Category 5 (Spouses): Sharing responsibilities is key. Working spouses should divide home chores based on expertise to avoid over-stressing one partner, particularly women who often bear the brunt of parenting and caregiving.
The Role of Time Management
Achieving balance is largely about saving time by reducing unproductive work (excessive social media, long commutes) and converting "idle time" (excessive sleep) into usable time.
Conclusion
Work-life balance is an art, not a luxury. Demanding fewer hours (e.g., 48 hours a week) does not guarantee balance if the remaining time is wasted. One can work 70 hours a week and still achieve balance by effectively utilizing time at home to recharge. We must not view work and life as opposing forces, but as integrated aspects of a satisfying existence. Every choice has a consequence, and a single wrong decision can ruin a career or home life.
Author may be reached at chaplotrajeshug@gmail.com and eboard@icai.in
Accounting for commission paid for performance bank guarantees, under Ind AS framework
Targets and Timelines
| Particulars | Targets | Extended Target Date |
|---|---|---|
| Ambala-Kurukshetra GA (Cumulative) | 31st March 2025 | |
| Total inch-Km of Pipeline to be Laid | 1142 Inch KM | |
| Infrastructure for PNG Domestic Connections | 20624 Connections | |
| Kolhapur GA (Cumulative) | 31st May 2025 | |
| Total inch-Km of Pipeline to be Laid | 1800 Inch KM | |
| Infrastructure for PNG Domestic Connections | 38760 Connections | |
| Other Condition (for both GA): | Bid Bond/ Performance Bank Guarantee | Rs. 1,948 Crores |
A. Facts of the Case
- Joint Venture Incorporation: A company was incorporated as a joint venture (JV) of two PSU companies (promoters H Ltd. and O Ltd.) to build and operate City Gas Distribution (CGD) networks in Ambala-Kurukshetra (Haryana) and Kolhapur (Maharashtra) after obtaining authorization from the Petroleum and Natural Gas Regulatory Board (PNGRB).
- Authorization Requirements: The authorization required the Company to furnish an upfront Performance Bank Guarantee (PBG) of ₹1,948 crore for the timely completion of a Minimum Work Programme (MWP) committed during bidding.
- Financing: The total project cost was estimated at ₹641.00 crores, with a debt-equity ratio of 70:30.
- Bidding Criteria: In the 8th round of bidding (2018), the highest additional bid bond offered was the decisive factor for declaring the successful bidder.
- BG Commission: The promoters shared the PBG equally (₹974 crore each) and charged the Company commission (BG commission) on a quarterly/monthly basis.
- Current Accounting Treatment: The Company has been capitalizing the BG commission as a cost directly attributable to bringing assets to their location and condition, as per Ind AS 16.
- Qualifying Assets: The Company considers its pipeline network and facilities as qualifying assets under Ind AS 23, estimating they require an average of five years to create.
- Partial Release Request: In 2023, the Company’s request for a partial release of the PBG was rejected by PNGRB, stating it would only be returned after completing MWP targets and the expiry of the exclusivity period.
- C&AG Observations: During a supplementary audit for F.Y. 2023-24, the Comptroller and Auditor General (C&AG) commented that capitalizing BG commission resulted in an overstatement of profit and non-current assets. C&AG argued this contravened Ind AS 23, which limits capitalization to directly attributable borrowing costs, and labeled the practice a material prior period error requiring restatement.
- Management's Defense: The Company argued that the PBG was an unavoidable precondition for authorization. They maintained that BG commission is not a borrowing cost under Ind AS 23 but a direct project cost under Ind AS 16, as construction could not have proceeded without it.
B. Query
The Expert Advisory Committee (EAC) was asked to determine:
- (i) Whether capitalizing ₹13.44 crore of BG commission is correct under Ind AS 16.
- (ii) If not, what the appropriate treatment should be.
- (iii) Whether any change in treatment should be handled as a change in estimate, a change in accounting policy, or a prior period error.
C. Points Considered by the Committee
- Scope of Ind AS 23: The Committee noted that there was no borrowing taken by the Company and the commission did not pertain to borrowings for a qualifying asset. Therefore, Ind AS 23 is not applicable in this case.
- Capitalization Principles (Ind AS 16): Capitalization requires costs to be directly attributable to bringing an asset to the location and condition necessary for operation.
- Direct Attribution Test: The Committee viewed "directly attributable" costs as those necessary to enable or contribute to construction activity.
- Nature of BG Commission: While furnishing the PBG was essential to obtain the authorization letter and the project itself, the commission did not contribute value to the construction activity or to the condition of the project.
- Decision: BG commission cannot be capitalized with the project or as an individual asset, as it does not result in a resource controlled by the Company. It must be expensed in the Statement of Profit and Loss as incurred.
- Error Classification: The Company’s current capitalization practice is not in accordance with Ind AS and must be corrected as an accounting error under Ind AS 8.
D. Opinion
Based on the facts provided, the Committee’s opinion is:
- (i) & (ii) The Company’s treatment of capitalizing the BG commission is not appropriate. It should be recognized as an expense in the Statement of Profit and Loss as and when incurred.
- (iii) This misapplication of accounting principles should be rectified in the current reporting period as a prior period error by restating comparative amounts for earlier periods, as required by Ind AS 8.
FEMA UPDATES
Foreign Exchange Management (Guarantees) Regulations, 2026
A.P. (DIR Series) Circular No. 19/2025-26 dated January 12, 2026
The Reserve Bank of India has issued the Foreign Exchange Management (Guarantees) Regulations, 2026, which supersede the earlier regulations under Notification No. FEMA 8/2000-RB. These new regulations mandate comprehensive reporting of all guarantees—including those issued, modified, or invoked—to authorized dealer banks using Form GRN.
Summary of Changes (2000 Regulations vs. 2026 Regulations):
- Definitions: The 2026 regulations provide detailed definitions for terms like guarantee, surety, creditor, principal debtor, and IFSC, offering greater clarity compared to the minimal definitions in the previous version.
- Prohibitions: While the old rules focused on resident prohibitions, the new framework restricts any party (surety, debtor, or creditor) unless they are compliant with the regulations, expanding responsibility to all involved.
- Exemptions: A consolidated exemption clause now explicitly codifies exclusions for AD branches abroad, IFSC, IPCs, and ODI guarantees, recognizing modern financial structures.
- Permissions: There is a shift from an approval-based to a principle-based framework; acting as a surety or principal debtor is allowed if the underlying transaction is FEMA-compliant.
- Creditor Rights: New clarity is provided for inbound guarantee arrangements, explicitly permitting resident creditors to obtain guarantees subject to compliance.
- Reporting and Fees: The new regulations introduce a mandatory quarterly reporting obligation in Form GRN. Additionally, an explicit Late Submission Fee (LSF) formula is now prescribed for delayed reporting to provide regulatory certainty.
Export and Import of Goods and Services
A.P. (DIR Series) Circular No. 20/2025-26 dated January 16, 2026
The Reserve Bank has comprehensively reviewed and issued the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, effective from October 1, 2026. These regulations aim to promote the ease of doing business, particularly for small exporters and importers.
Key Comparative Changes (2015 Regulations vs. 2026 Regulations):
- Export Realisation Period: This has been changed to a uniform 15 months, or 18 months for exports invoiced in INR.
- Reporting Mechanism: A single EDF (Export Declaration Form) will now be used for goods and services, including software, replacing the separate EDF and SOFTEX systems.
- Service Export Reporting: Filing must now occur within 30 days from the end of the invoice month.
- Advances and Imports: Rules for advances against exports now use risk-based thresholds set by AD banks. For imports, the Import of Services payment timelines are now governed by the underlying contract, and INR trade settlement (the Vostro route) has been formally codified.
- Merchanting Trade: The previous complex and restrictive rules have been replaced by a simplified system under AD bank risk-based oversight.
Matter on FEMA has been contributed by CA Manoj Shah, CA Hinesh Doshi, CA Sudha Bhushan, and CA Viral Satra, all from Mumbai.
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